Never short a dull market

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

Activity quiets down on the New York Stock Exchange as shares settle into their two-week range. Wednesday's high-low spread in the futures was the second-narrowest in the last 10 sessions. Price closes in the upper portion of each day's travel range recently.

The chart below shows the vaults of Dec. 31 and Jan. 2, and their aftermath. The fact that price has scarcely dipped since then objectively says that institutions are not selling into this rally. For the most part, they are content to sit on positions and are not interested in locking in profits.

All of this adds up to a market that wants to go higher.

If this was the end of a bull market, the Dec. 31-Jan. 2 move would have been used as an opportunity to dump positions. Institutions begin to sell into a rising market which provides the demand for the shares they need to off.

Of course, this could begin to change tomorrow. But for most speculators and shorter-term traders, it is best to stay in synch with the trend — i.e. what the market has already done — and not try to predict when that will turn. And at this moment the trend is up.

It is to be noted that volatility is mean-reverting. In theory, this means it will go from one extreme to something closer to an average. In reality, volatility will often overshoot the average and go to the opposite extreme. As the above S&P chart shows, the extreme of two wide-range days yielded to the opposite extreme, a series of very-narrow range bars.

Thus, the current low-volatility action is expected to yield to something more dynamic. Because most consolidation periods, which is what the averages are currently in, tend to result in upward revaluation, this is a likely prospect.

Volatility tends to be high early in a bull and late in a bull. This is true not only for the averages but also for individual issues. The end of a bull market is normally characterized by choppy, back-and-forth activity. Big swings that do not produce much upward price progress. This has yet to be seen.

Meanwhile, the Naz, influenced in part by Apple's (AAPL) 6.4% drop of Monday/Tuesday, looks weaker than the S&P.

Many leading titles adopt the same tightness in their chart pattern as do the averages. This is a positive.

Among the names, Facebook
FB, -6.77%
pulls back near support at the top of its prior five-week base. The prior up leg was fairly steep, just like the November up leg. The Jan. 14 high at 32.21 is a logical pivot for a breakout entry.

A positive is Tuesday's volume of 142% above average drying up to Wednesday's of just 4% above average. Moreover, Tuesday's 2.7% decline ebbed to a Wednesday loss of 0.8%. Also, Tuesday's close was near the bottom of the day's range vs. the mid-range close of Wednesday.

In other words, the supply-demand quotient — momentum — changes at the margin. The view here is that this is the stuff that is more important than any analyst's comment, opinion, or forecast. It is unbiased, it is objective, it is available to all, and it does not lie.

Ocwen Financial
OCN, -2.02%
was discussed here one week ago ("The all-time high set Oct. 24 at 39.83 represents a suitable entry pivot."). Price acted very well over the last week and is now 3.6% below the pivot. The comment stands.

Sherwin-Williams
SHW, -0.90%
is a paint-store operator with over 3,400 locations. The company, a play on the housing sector's resurgence, is expected to show earnings growth of 32%/19% in '12/'13. Technically, SHW sets up in an eight-week cup-with-handle base. The handle, just five sessions old, is exceptionally shallow, a plus.

An intermediate-term speculator can consider the top of the handle, Jan. 9's high of 163.14, to be a logical pivot point for entry. A protective sell stop of 6% below entry would be just below the 50-day moving average.

Equinix
EQIX, -1.95%
on Dec. 28 was discussed as "...looking pregnant and can be taken above the Oct. 1 high of 207.77." The stock moved through the pivot and has formed a tight ledge with a miniature depth of just 2.8%. A breakout through the Jan. 10 high of 219.91 could serve as a pivot for an add-on position.

Elsewhere, United Rentals
URI, -0.48%
could be taken above the Jan. 4 high of 49.73, with Cornerstone Ondemand
CSOD, -1.88%
above the Jan. 11 high of 31.75.

In summation, the initial wave of leaders have broken out. While few have yet to reach the 20%-25% benchmark hurdle, few have failed post-breakout. A few more set up, and these are noted above. Earnings release dates should be checked prior to entry, and position sizes either adjusted lower or, depending upon one's position on the risk stratum, not taken at all. Institutions appear to be digging in for an extended stay. This by virtue of the paucity of profit-taking and feeble movement in the averages post-Jan. 2.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

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